An EC consultation is open for comment until 13 May
Capital Markets Union (CMU) is a European Commission plan that aims to create deeper and more integrated capital markets in the 28 member states of the European Union.
The commission states that it ’will explore ways of reducing fragmentation in financial markets, diversifying financing sources, strengthening cross-border capital flows and improving access to finance for businesses, particularly SMEs’.
The commission consultation aims ‘to get a shared diagnosis of the problems and set out an agenda of the initiatives to take’, and is open for comment until 13 May. To take part, visit the European Commission website.
The commission already plans to:
The green paper highlights a number of barriers and opportunities. The commission discusses how alternative means of funding can be developed, and states that ‘although the online nature of mechanisms such as peer to peer lending and crowdfunding would suggest great potential to contribute to the financing of the economy across national borders, there is limited evidence of cross-border or pan-European activity’.
The commission notes that crowdfunding is active locally but that different regulations impede cross-border growth.
The regulatory framework is also highlighted as an area that needs further work; the commission states that the single rulebook highlighted in the report would be ‘a major step towards a more harmonised regulatory framework for capital markets in which firms can compete cross border on a level playing field.’
The commission also notes that gold-plating has continued to be undertaken by member states; it is also recognised that differences in company law, corporate governance, insolvency and taxation present obstacles to cross-border business mobility and restructurings.
One of the suggested outcomes is that ‘reducing these divergences [a level playing field] could contribute to the emergence of pan-European equity and debt markets, by reducing uncertainty for investors needing to assess the risks in several Member States’.
Differences in tax regimes across member states were also highlighted as an impediment to the development of a single market for capital; it’s highlighted that differences in the tax treatment of different types of financing may create distortions:
‘For example, differences in the tax treatment of debt and equity financing might increase the reliance of companies on debt and bank funding.’
The commission also cites tax incentives and comments that ‘a recent study commissioned by the European Commission concluded that targeting tax incentives for R&D expenditure at young innovative companies is an effective practice’.
Reproduced below you can read the section from the green paper from the section Company law, corporate governance, insolvency, and taxation:
EU legislation exists in the area of corporate governance (eg on corporate governance statements, on the cross-border exercise of shareholder rights), but corporate governance often remains the preserve of domestic law and standards.
After the financial crisis a review of the EU corporate governance framework was undertaken through two consultations.
The revision of the shareholder rights directive which is underway aims to encourage institutional investors and asset managers to provide more long term capital to companies.
The protection of minority shareholder rights improves corporate governance and the attractiveness of companies for foreign investors, since these may often be minority investors.
Another aspect of sound corporate governance is the efficiency of company boards in terms of controlling company managers. As company boards protect the interests of investors, efficient and well-functioning company boards are also key to attracting investment.
Despite several directives on company law, businesses still face important obstacles to their cross-border mobility and restructurings.
Further reforms to company law may be helpful in overcoming barriers to cross-border establishment and operation of companies.
Divergent national conflict-of-law rules regarding the internal functioning of a company can cause legal uncertainty, as they may lead to a situation where a company is subject to the laws of various Member States at the same time, for instance, in cases where a company is incorporated in one Member State but operates mainly from another Member State.
While the discussion around harmonising substantive insolvency legislation has been slow over the past 30 or so years due to its complexity, there has been considerable progress in the area of conflict-of-laws rules for cross-border insolvency proceedings.
However, underlying national insolvency frameworks are still divergent in their basic features and in their effectiveness. Reducing these divergences could contribute to the emergence of pan-European equity and debt markets, by reducing uncertainty for investors needing to assess the risks in several Member States.
Furthermore, the lack or inadequacy of rules enabling early debt restructuring in many Member States, the absence of ‘second chance’ provisions, and the excessive length and costs of formal insolvency proceedings can lead to low recovery rates for creditors and discourage investors.
With a view to achieving progress on insolvency, the Commission adopted a Recommendation on a new approach to business failure and insolvency in which it urges Member States to put in place early restructuring procedures and 'second chance' provisions.
The recommendation also invites Member States to consider applying the principles to consumer over-indebtedness and bankruptcy. An evaluation of the Recommendation is planned for 2015.
Differences in tax regimes across Member States can impede the development of a single market for capital. For example, they can create obstacles to cross-border investments such as pensions and life insurance.
As a follow-up to the White Paper on Pensions, the Commission conducted a study on discriminatory rules relating to pension and life insurance capital, contributions, and pay-outs. The Commission will take action as necessary if any discriminatory rules are found and discriminatory tax rules on cross-border investments by life insurance companies and by pension funds in real estate at a later stage.
Work is also continuing on simplifying withholding tax relief procedures related to post-trading.
In addition to the tax treatment for different market participants across Member States, there are also differences in the tax treatment of different types of financing, which may create distortions. For example, differences in the tax treatment of debt and equity financing might increase the reliance of companies on debt and bank funding.
Furthermore, differences across Member States in the definition of debt and equity and their respective tax treatment, including in relation to regulatory capital instruments, may hamper a level playing field, fragment markets and create opportunities for profit-shifting.
Finally, obtaining finance is especially difficult for start-ups as they lack collateral and a proven track record that can provide certainty to suppliers of financing. Start-up companies are, however, more likely to bring innovations that challenge the market position of large incumbent firms.
A recent study commissioned by the European Commission concluded that targeting tax incentives for R&D expenditure at young innovative companies is an effective practice.